The Bankruptcy Abuse Prevention and Consumer Protection Act, which went into effect last October, is not working as Congress had intended it to work, according to a new report by an association of bankruptcy attorneys. The report, published by the Washington D.C,-based National Association of Consumer Bankruptcy Attorneys (NACBA), is called, "Bankruptcy Reform’s Impact: Where Are All the Deadbeats?"
"The federal bankruptcy law changes that went into effect on Oct. 17, 2005, are doing no measurable good whatsoever," said Brad Botes, executive director of NACBA. "Instead, they have put new hurdles in the path of people who are already flat on their back due to financial crises over which they have no control, such as the loss of a job, catastrophic health care bills, and so on."
The report analyzed data from a cross-section of six credit counseling firms that were authorized by the U.S. Justice Department’s Executive Office for U.S. Trustees to provide bankruptcy screening. Under the bankruptcy reform, individuals must meet with a credit counseling firm to be eligible to file for bankruptcy.
The report found that of the 61,355 consumers in the nation who filed for bankruptcy since the reform went into effect, 97 percent are unable to repay any of their debts.
Seventy-nine percent of would-be filers who met with credit counseling firms prior to filing were forced into their current financial situations by circumstances beyond their control, including the loss of a job, the death of a spouse or medical bills, the report said.
The bankruptcy reform was enacted last year after heavy lobbying from credit card companies and banks, who contended that too many people were abusing the system and simply filing for bankruptcy after piling up irresponsible debt, even though they had high incomes. Critics of the reform contended that credit card companies themselves were to blame for such bad debt, because they provided too much credit too easily to consumers, even college students.
A problem with the reform is that debt created by medical expenses is now the leading cause of personal bankruptcies in the nation, according to a study by the Harvard University.
"As far as I can tell, people are still getting sick, still losing their jobs and still filing for bankruptcy," said Timothy Nixon, a shareholder with Godfrey & Kahn S.C. in Milwaukee. "I think it is cruel legislation. On the other hand, I agree that it takes time to tell. But it is an experiment that we are performing on the poorest level of society."
The American Bankers Association (ABA) is a proponent of the reform and agrees that most people filing for bankruptcy are not taking advantage of the system. However, some consumers do abuse the system, ABA spokeswoman Laura Fisher said.
"The study’s findings were that only a small percentage of people can repay their debts, which is something that we have said," Fisher said of the NACBA study. "We wanted more of the high income filers to repay more of what they owe, which is about 5 to 10 percent of filers, which is pretty consistent with (NACBA’s) findings."
As the new bankruptcy law went into effect last October, some local attorneys said inconsistencies in the bankruptcy code would need to be worked out.
Now, five months later, some local bankruptcy attorneys and national organizations continue to raise concerns about how the reforms to the bankruptcy code will affect people who need to file for bankruptcy.
"I think, unfortunately, the parties who pushed for the adoption of (the reforms) were not willing to listen to what was often intended to be constructive criticism from bankruptcy judges and lawyers who were all consigned to the bankruptcy industry," said Paul Lucey, a litigation attorney for Michael Best & Friedrich LLP. "None of that input had much of an audience among people pushing the bill, so there are a lot of technical problems."
Lucey represents creditors in business bankruptcies, but he thinks that the language and requirements in the new law will cause difficulties in the courts.
"I think there will need to be follow-up legislation to fix the errors that proponents of the law ignored year after year as it was being considered by Congress," Lucey said.
"(The reform) was first introduced in 1998 and over the years, civil rights groups, women’s groups, children’s groups, the Commercial Law League of America (CLLA), banks, judges, trustees, academic attorneys and church groups have all weighed in, saying this is a bad idea. It is a remarkable gamut of organizations," said Cathy Vance, vice president of research and policy for Development Specialists Inc., a Columbus, Ohio-based management consulting firm. "The only people who supported this were the National Retail Federation, bankers, creditors and Prof. Todd (Zywicki, a research fellow at George Mason University)."
A surge in filings prior to Oct. 17 made it difficult for both skeptics and proponents of the bankruptcy reform to draw conclusions regarding its effectiveness.
The U.S. Bankruptcy Court for the Eastern District of Wisconsin had 6,668 bankruptcy filings in October 2005, compared with 1,180 in October 2004, said Christopher Austin, clerk of court for the Eastern District.
The reform has put so many requirements into place that there is no wiggle room for exceptions to the rule, Vance said. Vance previously practiced law with a focus on bankruptcy. She is a member of the CLLA, based in Chicago.
"It seems like a lot of the things that were rattling a lot of nerves last summer are not the issues that are starting to emerge," Vance said. "It seems like in some respects, there are some issues sneaking up on us that we were not originally focused on, for instance Hurricane Katrina came along."
Marc Stern, a Seattle-based bankruptcy lawyer who also is a member of the CLLA, said he is personally dealing with little wiggle room. One of his clients needs to file Chapter 11 to avoid foreclosure on his restaurant, Stern said. The client is Chinese and speaks little English.
When Stern attempted to follow the requirement of seeking credit counseling before his client could be eligible for filing bankruptcy, he could not find a credit counselor that was approved by the U.S. Justice Department who spoke Chinese.
Because of the problem, the U.S. Trustee moved to dismiss the case, Stern said. Stern has not yet heard if the filing was actually dismissed, he said.
"If Congress said this is such an important thing, how can you offer it on a discriminatory basis?" Stern said. "And if it is not important, then why are we doing this?"
Bruce Lanser of the Milwaukee-based Lanser Law Office said the new code is much more stringent than before, but in the end, most people are able to file for bankruptcy.
"I think every bankruptcy lawyer in the country is trying to figure out what exactly the new laws say and what they mean," Lanser said. "A lot of people who are filing are in a sense guinea pigs because a lot of us don’t know how to shake everything out."
The ABA continues to support the changes, Fisher said.
"In the past, we have had some high-income filers that used the system as a refinancing tool to walk away from their debts," Fisher said. "We want to let people know that bankruptcy is still open for business and we want to get the message out that people should get some help. The courthouse doors are open."
As more consumers and businesses file for bankruptcy and, possibly, more exceptions are presented, the courts will move more toward the middle of the road in their rulings and the kinks will work themselves out, Vance said.
Nixon predicted that it would take two to three years to see the actual effect the bankruptcy reform will have on consumers who are in financial catastrophes.
In the meantime, bankruptcy attorneys will continue to seek the best answers for their clients, and some will continue to criticize the reform.
"It is the best bill money could buy," Stern said.
